ECB raises key rates by 50 bps in July monetary policy decision vs 25 bps expected

  • Prior decision
  • Deposit facility rate 0.00% vs -0.25% expected
  • Main refinancing rate 0.50% vs 0.25% expected
  • Marginal lending facility 0.75% vs 0.25% prior
  • Decision to raise by 50 bps is based on updated assessment of inflation risks
  • ECB approves of Transmission Protection Instrument (TPI)
  • Further normalisation of interest rates will be appropriate
  • Frontloading strategy allows ECB to make a transition to a meeting-by-meeting approach
  • The establishment of the TPI is necessary to support the effective transmission of monetary policy
  • TPI can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy
  • PEPP reinvestments remains the first line of defence to counter those risks though
  • Full statement

The euro has jumped on the decision with EUR/USD moving up from 1.0195 to 1.0250 as the ECB chooses to frontload its interest rate increases. In my view, it is a bit careless as their communication through all these months have been to push for a 25 bps rate hike but it is what it is.

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